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Target shares tumble after profit miss, big jump in inventories

A customer leaves one of the stores of discount retail chain Target in Ancaster, January 15, 2015. REUTERS/Peter Power/Files

By Nandita Bose

(Reuters) - Target Corp said on Tuesday that third-quarter profit missed estimates as investments in its online business, higher wages in a tight labor market and price cuts hurt margins and a big jump in inventories ahead of the critical holiday season worried investors.

Target shares tumbled as much as 15 percent as the retailer also reported that comparable sales missed expectations.

The third-quarter performance was in sharp contrast to rivals Walmart Inc and Macy's Inc, which raised their forecasts for the current year as a strong economy boosted consumer spending.

Addressing the margin pressures, Chief Executive Officer Brian Cornell reiterated on a conference call that its efforts to boost growth "involves a commitment of resources, which explains why I've already used the word investment five times in these remarks."

Wall Street did not take well to Cornell's comments. "It's becoming a margin story for Target," said David Russell, a vice president at TradeStation, the fifth largest U.S. digital trading platform, adding that investors expected better margins despite its investments.

"Brian Cornell was outspoken multiple times in the past months about how great business was and that adds to the shock on the Street today," Russell said.

During the second quarter, Cornell said the consumer environment is "perhaps the strongest I've seen in my career."

Analysts said the inventories were weighing on the stock. Cowen analyst Oliver Chen said they jumped 17.8 percent year over year versus sales growth of 5.3 percent, implying a negative 12.2 percent sales-to-inventory spread.

"(This) spread was negative for the third consecutive quarter," he said. Target said it was carrying higher inventories in anticipation of increased holiday spending.

Target expects to deliver a strong holiday performance by expanding its toy department in more than 500 stores, offering two-day free shipping with no minimum purchases on thousands of items and accelerating the pace of store remodels, he said.

Target expects same-store sales to rise about 5 percent in the final quarter, signaling a slowdown during the most critical time of the year for retailers even though it was above estimates of 4.8 percent. For the latest quarter sales rose 5.1 percent.

Excluding items, Target earned $1.09 per share in the quarter, below the average estimate of $1.12.

Gross margins were 28.7 percent, falling short of the estimate of 29.55 percent.

Sales in the quarter totaled $17.59 billion, below the average estimate of $17.8 billion.

Online sales soared 49 percent, outpacing the 41 percent rise in the second quarter and a 28 percent gain in the first. Target is offering free two-day shipping on many items through Dec. 22 with no minimum order or membership required.

The Minneapolis-based retailer said it gained market share in all key product categories and customer traffic rose 5.3 percent.

Target was still confident of its earlier full-year adjusted earnings outlook of $5.30 to $5.50 per share versus the Wall Street view of $5.41, according to IBES Refinitiv.

Target shares slid 9.9 percent to $69.51 after falling as low as $66.12.